Saturday, October 26,
2019 / 05:45PM / By ARM Research
This week, Japan recorded a lower trade deficit of Â¥123 billion in the month of September, following a faster decline in Exports (-5.2%) relative to Imports (-1.5%). The contraction in exports marked the 10th consecutive monthly decline following lower sale of cars, airplanes and semi-conductors. A raft of Manufacturing PMI data for October was released this week. Starting with Japan, manufacturing PMI continued its downward spiral with October numbers printing at 48.5 (September: 48.9)-lowest level since June 2016. This decline stemmed from a sharp drop in new orders (lowest since December 2012) as trade tensions and global economic weakness restricted exports. Elsewhere EU's PMI remained flat at 45.7 index points while manufacturing PMI reading in US expanded 4 pts to 51.5-the fastest increase in 6 months.
In a follow up to an instruction to banks last week preventing any borrowing customer of the banks from investing in treasury bills or OMOs, the CBN issued two new circulars this week. The first was to prevent corporates and individuals from investing in open market operation (OMO) bills at the auction. While the second was to provide clarity that the previous circular implied a total ban on corporates and individuals from primary and secondary OMO market activities. In terms of impact, we see scope for liquidity surfeit in the system which sits well with FG's quest to trim its cost of debt service.
Amidst flurry of not so exciting earnings releases this week, the Nigerian bourse ended negative (-0.38% WoW to 26,348 pts). Aside the Cement sector (+0.52%), all sectoral indices reported losses; Banking (-0.08%), Brewers (-1.82%), Telecom (-0.53%), Personal Care (-0.70%), Food (-0.19%), Insurance (-3.11%) and Oil & Gas (-0.84%) WoW. The losses were largely driven by bell-wether including ZENITH (-2.58%), ACCESS (-0.68%), MTNN (-0.77%), which muted gains in DANGCEM (+0.69%) STANBIC (+2.07) and UBA (+1.74%).
Over in the secondary market, average fixed income yields closed 11bps higher WoW at 13.37% as NTB yields rose 32bps to 12.73% while bond yields finished 10bps lower at 14.02%. However, bulk of the increase (+22bps) was realised before the CBN announced its new directive on Wednesday. Since the announcement, average yields have been down 11bps reflecting higher de-mand with NTB yields declining 12bps and average bond yields dropping by 10bps. We expect this trend of lower fixed income yields to continue strongly into next week. Despite CBN's new directive, demand at the two OMO auctions this week remained robust (N684 billion) which was 1.52x of offer. Following the pent-up demand at the auction, the 1yr stop rate closed 1 bps lower to 13.34%. Meanwhile, despite the N256 billion subscription at the bond auction, the DMO sold N143 billion worth of FGN bonds (including N3 billion non-competitive bids), 5% shy of its October offer.
Take-Away For The Week
Trend in bank loan book (N million)
As the saying goes, "the end justifies the means". Same applies to the Nigerian banking industry. For context, the apex bank in July directed DMB's to maintain a minimum loan-to-deposit ratio of 60% which was eventually revised higher to 65%, in a bid to stimulate credit to the private sector. Against this backdrop, recent 9M 2019 earnings release for the banks showed significant growth in their loan books.
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